The Hindu : Business : Exports: Need for corrective action

Online edition of India's National Newspaper
Monday, Jun 14, 2004

Business

Business

Exports: Need for corrective action

Fierce competition, thinning profit margins, high transaction cost and volatility of the rupee-dollar rate are a combination of factors that could drive the most venturesome of exporters away from the export business.

THAT INDIAN products and services are able to meet the most demanding international standards of quality and price has been established and exports have been rising notwithstanding competition. In fact, the 12 per cent growth target set by the Government in the last two years has proved too modest. In fiscal 2002-03, exports grew by 20 per cent while last year the growth was 17 per cent, despite a continuous appreciation of the rupee against the U.S. dollar.

The confidence that this performance has given exporters has been further boosted by the strong support assured by the new Government. Both Finance Minister, P. Chidambaram, and Commerce and Industry Minister, Kamal Nath, lost no time in consulting the Federation of Indian Export Organisations in their endeavour to provide exporters the wherewithal and the environment required to maximise exports.

In his first meeting with exporters under the auspices of FIEO on May 27, Mr. Kamal Nath was categorical that the Government's objective was to make India a hub of manufacturing and a service provider to the world. And Mr. Chidambaram, during his meeting with the Federation on June 4, took note of the various suggestions and ideas submitted for strengthening the exporters' hands.

It is common knowledge that when compared to competitors in the Southeast Asian region, Indian exporters suffer from a number of handicaps in the matter of export-related infrastructure, cost of finance and transaction cost. An immediate issue in this regard is the adverse impact of the complete withdrawal of the benefits of Section 80-HHC of the Income- tax Act from the Assessment Year 2005. Fierce competition, thinning profit margins, high transaction cost and volatility of the rupee-dollar rate are a combination of factors that could drive the most venturesome of exporters away from the export business. (This needs to be seen against the laudable desire of the Commerce Minister to widen the exporter base).

To sustain the growth momentum, the Federation has suggested to the Finance Minister first to continue the benefits of Section 80-HHC till 2010. From the time these benefits were introduced in April 1983, exporters, especially the small and medium ones, have been greatly helped in their export effort. If the benefits get stopped as scheduled, the small and medium entrepreneurs will be at a disadvantage as a similar facility will continue for units in the Special Economic Zones under Section 10-A, and for export oriented units under Section 10-B of the Income-tax Act. The small and medium sized units, coming under the purview of the Domestic Tariff Area (DTA), now contribute around 85 per cent of India's exports and hence need strong support.

The transaction cost for Indian exporters is indeed quite high when compared to what competitors in neighbouring countries bear. The Government has also conceded this point. To help exporters combat this disability, the Federation would like the reintroduction of Section 35-B (Export Market Development Allowance) which was withdrawn in 1987. This section, introduced in the Finance Act 1968, allowed weighted deduction of an amount equal to 1.33 times the qualifying expenditure. Alternatively, the Government can introduce a scheme earlier available under Section 35-A by which a deduction equivalent to 133 per cent of the investment was allowed for being ploughed back into business.

The Finance Minister may also consider exempting DTA units that have got converted to EOUs or those shifting to SEZs from income tax as denying them could hurt efforts to raise exports from the EOU sector.

Exporters are also experiencing difficulties in the matter of the Duty Entitlement Pass Book (DEPB) Scheme. This scheme is essentially for refund of duties in the form of credit and, as such, is similar to the Duty Drawback Scheme. However, this scheme has not been included in Section 28 of the Income- tax Act (perhaps inadvertently). And because of this lapse, field formations are not accepting DEPB as an export income for computation of export profits under Section 80-HHC, as is being done in the case of duty drawback. This odd interpretation is hurting exporters, especially those in the southern and western parts of India. The Finance Minister's attention has been drawn to this problem and it has been suggested that Section 28 be suitably amended with retrospective effect to resolve the problem once and for all.

The Government's decision to implement value added tax (VAT) has the exporters' full support as it will include `zero rating' of exports for manufacturers and exporters, including inter-State exporters. However, a mechanism should be devised by which merchant exporters will be able to claim reimbursement of the input tax paid at the earlier stage of manufacturing. In addition, it would be better if the Government exempted manufacturer-exporters exporting 75 per cent or more of their production from input tax through a system akin to Form C in the Sales Tax Act.

M. Rafeeque Ahmed

President, Federation of Indian Export Organisations

Printer friendly page
Send this article to Friends by E-Mail

Business

News Update

Stories in this Section

Production falls even as reserves rise

A re-look at the rupee

Exports: Need for corrective action

Size is critical

Two-way price moves in stocks

Weblog navigation tools

Is the assessee bound to disclose source of income?